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April 26, 2012

Charles Biderman: The 2012 IA 25 Extended Profile

‘Volatility of investing in a rigged market’ is advisors’ biggest challenge in the near term

Charles Biderman, President and CEO, TrimTabs

Charles Biderman, president and CEO of investment research firm TrimTabs, started his career as a stock margin clerk at Francis I. du Pont & Co.

“It was the only job I could get with a BA from Brooklyn College,” he says. “The only way to get into the front office was to get an MBA,” so, naturally, he went to Harvard Business School.

Following his graduation from Harvard Business School, he started working with short sellers and shorting the real estate market in the mid ‘70s. In 1975, he bought 1,000 apartment units, two office buildings and six shopping centers from bankrupt REITs. Unfortunately, in 1987, he got caught in another real estate crash and started TrimTabs in 1990, recommending investors short banks that were stuck with a lot of bad real estate.

TrimTabs provides real-time data on the supply and demand of stocks and money available for investment, Biderman says. “All there is in the stock market are shares of stock, and since 80% of stock is owned by institutions, we track money flows in and out of institutions. We also track real-time data on income tax collection, because the most influential factor in money available for investment is income.”

The company’s efforts have attracted the attention of the Bureau of Labor Statistics and the Bureau of Economic Analysis. “We’ve had a five-year long fight with the BEA and the BLS,” Biderman says, “because they don’t like the fact that we say they only use surveys and they ignore the real-time data available in income tax collections because that means they would be out of a job.” For example, in the first quarter of 2011, TrimTabs said the economy was growing faster and there were more jobs being created than the BLS or the BEA was saying. Two months before our interview, Biderman says, they revised the first-quarter numbers to figures similar to TrimTabs’ estimates.

For advisors, the “volatility of investing in a rigged market” will present a major challenge over the next year. “The Federal Reserve has admitted that it is concerned about maintaining and supporting asset prices,” Biderman says. “At some point, that will end. Either the economy recovers and the rigging of the market ends,” he says, adding that “it probably still will be a nasty decline. Or worse, the economy doesn’t recover and they continue to rig more and more, and the eventual decline will be much, much more severe.”

“Navigating the unfixing” of the market, Biderman says, will be a challenge advisors have to face, “however it occurs.”

Another challenge, he says, is one of odds. “In a world where mathematics say that individuals can’t beat the market, how do you invest appropriately for your client given that the odds are against you from the start?” Biderman asks. “How do you create portfolios for the prospect of inflation and deflation occurring at the same time?”

To try to answer those questions, TrimTabs partnered with AdvisorShares to build an actively managed ETF, TrimTabs Float Shrink (TTFS). “Biderman Market Theory says that in the stock market, as in every market, the house always has the advantage over the players,” Biderman says. “Individuals can’t beat the market. However, companies do have an edge over the investors. They know more than we do. When companies are optimistic, they will reduce the number of shares outstanding via buybacks. If they’re pessimistic, they’ll be selling more shares than they’re buying.”

TTFS buys 100 companies that are shrinking the number of shares net of new issuance the most; growing free cash flow; and have a debt-equity ratio that is not increasing. Over the first six months that the fund has been available (it was launched Oct. 4, 2011), it’s up 28%, Biderman says.

“If the house has an advantage, I want to invest with the house. Our success over the years has been due to my ability to relate to what’s really going on with simple-to-understand supply and demand concepts.”

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